What is Vendor Management: Meaning, Process, Examples, Benefits, How to Manage Vendors?

Vendors and suppliers are critical stakeholders in any business. They supply raw materials as production inputs and share a part of the business risk as fellow entrepreneurs. Any business owner must learn what it takes to manage vendors and suppliers effectively and follow the best practices of vendor management processes. 

This article discusses what is vendor management, the process flow, and other essential components of vendor management. 

What is vendor management? 

Vendor management is the practice of establishing, nurturing and strengthening business relations with vendors and suppliers with the ultimate aim of mitigating sourcing risks and optimising material and services costs. Under this concept, 

• vendors are categorised as sellers of finished goods  and services, while
• suppliers are sellers of semi-finished or unprocessed raw materials. 

Vendor management is a multi-stage process, including vendor selection, onboarding, contract management, and performance monitoring.   

Importance of vendor management

Effective and efficient vendor management is critically important for every type of business- manufacturing, services, or trading. Lack of an established practice of effective vendor management can cause a company to face several obstacles in its day-to-day business process and over the long term. Effective vendor management is essential because it helps: 

• Maintaining cost efficiency - This involves negotiating sourcing deals at competitive costs to control production costs. 
• Quality control and assurance - This involves encouraging and supervising vendors to ensure the supply of materials of pre-specified quality.   
• Mitigating sourcing risks is essential for identifying potential disruptions and avoiding them with timely preventive measures. For example, a vendor with insufficient working capital may fail to deliver on time. Correct vendor management can help buyers make alternative arrangements or avoid choosing such vendors.   
• Regulatory compliance - This ensures vendor and supplier compliance with legal regulations and company policies. 
• Seamless operational scalability—It is critical for companies to ensure the scalability of supply while facing seasonal and non-seasonal market fluctuations. 

The key components of vendor management

Being a multi-stage business process, effective vendor management comprises several components. These are: 

1. Vendor selection 
2. Contract negotiation 
3. Vendor onboarding 
4. Compliance 
5. Performance monitoring 
6. Risk mitigation and management

Each component is equally essential to ensure reliable management of vendors and suppliers. Activities under each component can occur simultaneously and continue on an ongoing basis. For example, finding more capable vendors may continue even when a company has already secured sourcing from existing vendors and suppliers. 

• Vendor selection involves continuously seeking new suppliers and vendors who can meet your business's sourcing requirements on time, at competitive rates, and with pre-specified quality standards. 
• Contract negotiation involves a company formalising the sourcing arrangement with a vendor by drawing a mutually agreeable contract specifying legally enforceable conditions, responsibilities, and rights.  
• Vendor onboarding begins once a contract is formalised with a vendor. This involves inducting and integrating a new vendor into the company's systems and processes. 
• Compliance is an ongoing activity that requires a company to educate, train, and oversee its vendors' compliance with various regulatory and policy requirements. Companies must avoid their compliance issues. 
• Performance monitoring is a continuous process in vendor management that evaluates and identifies areas for improvement. It also facilitates analysing and adjusting sourcing strategies and sourcing-related risk mitigation.   
• Risk mitigation and management involves understanding and identifying potential risks for suppliers and the buyer company. For example, a baker sources wheat flour from multiple vendors, but all of them are from a particular district. Any sudden local disturbance in that district may cause a shortage of flour for the bakery. So, as part of effective vendor management, the baker company should have vendors from multiple localities. The company may also increase flour stock if it expects supply disruptions. Risk management-related activities continue throughout the vendor management process, including before, during and after onboarding a vendor.   

Vendor Management Process 

How to manage vendors? 

Effective vendor management is crucial for any business to ensure operational cost efficiency, control of product quality, and meeting fluctuations in market demand seamlessly. To manage vendors effectively, 

1. A company must establish a robust vendor management process specific to its industry and size.  
2. Communicate the company's expectations regarding the quality and delivery timeline to vendors clearly at regular intervals and maintain transparency in dealings with vendors. 
3. Respect and understand vendors' interests as collaborators, as they are integral to the business's overall success. 
4. Establish a mutually beneficial partnership with vendors by positively maintaining and managing vendor relations. 
5. Encourage and support vendors in developing and growing their business. 
6. Leverage digital technologies and best vendor management practices on mutually agreed terms and conditions.  

Vendor management examples

Suppose a company, say ABC Ltd, enters the business of manufacturing sports bicycles. They decide to source different components from different suppliers, assemble those components in the company's workshop, and sell the finished bicycles under the company's brand. Vendor management for the company ABC will involve, 

• First, it is necessary to finalise the bicycle models they want to sell, the components required for assembling each bicycle, and the number of cycles they expect to sell in a period. 
• Once the list of components and the volume of materials needed are final, ABC Ltd should start searching among suppliers in the market who can supply them with components at competitive rates and within the delivery timeline. 
• Once they find potential suppliers available, the company should request potential vendors for price quotations (Request for Information, RFI or Request For Proposal, RFP) along with terms and conditions of supply. 
• Based on RFIs and RFPs, ABC Ltd selects the most suitable vendors for their needs and formalises sourcing contracts with preferred vendors.    
• Once vendors are onboard, ABC Ltd places purchase orders with the vendors of different components. 
• Vendors supply components based on PO and raise invoices for payment processing. 
• ABC Ltd inspects the supplied components for quality and quantity compliance and accepts or rejects the supply. 
• If accepted, ABC Ltd. processes the payment according to pre-specified payment terms, placing more POs as business demand dictates. 
• If rejected, the company may reconsider the terms and conditions before ordering from the vendor again and look for alternative suppliers. 

Benefits of vendor management

Effective vendor management is also beneficial for the recipient company and the vendor. Some of the prominent benefits are:

• Cost optimisation - Following the right vendor management process helps companies source materials competitively and ensures minimum cost escalations. 
• Risk prevention - Continuous monitoring of vendor performance helps anticipate potential disruption in sourcing and takes timely corrective measures. 
• Strong business resilience - Companies with satisfied and supportive vendors can better survive market disruptions.  
• Improved vendor performance - Positive vendor management helps vendors improve their competitiveness and capacity to supply on time and ensure quality and compliance. 

Challenges in vendor management 

Some of the common challenges companies may face while establishing vendor management best practices are:

• Unorganised business practices by suppliers—Some common examples are the absence of formal contract documentation, the employment of child labour, and the lack of GST registration.  
• A limited number of vendors and suppliers - This causes a lack of sufficient choices and bargaining power for buyers.  
• Lack of long-term business vision among vendors - Small-scale suppliers and vendors may not have a risk appetite for long-term investment in capacity building. This may limit a buyer's intention to grow. 
• Lack of information sharing from the vendors' side—Cloud-based vendor management tools can monitor real-time processes. However, vendors also need to share electronic data. Lack of digitisation at vendors' end or lack of willingness to share data may restrict the capability of automated vendor management systems at buyers' end.  
• Manual vendor management system - Companies following manual vendor management practices may suffer from manual data entry errors or lack of timely data availability. 
• Manual order processing by vendors—This may cause excessive time spent processing purchase orders and delays in the despatch of orders. 
• Unwillingness to adopt tech by vendors—Legacy technologies used by vendors may restrict buyers' ability to adopt and seamlessly integrate new vendor management tools.

Vendor management best practices

The broader components of vendor management remain similar across industries. However, vendor management techniques and tools may differ significantly across industries, operations scales, and supply chain tiers. 

For example, manufacturing companies may follow unique vendor management practices compared to services sector companies. Similarly, vendor management in food processing can differ significantly from vendors and suppliers in the automobile industry. To understand vendor management best practices, we shall discuss the broad contours of vendor management activities applicable to any entrepreneurial venture and business. 

• Understand your company's sourcing requirements through elaborate groundwork 
• Identify vendors who match your requirements (costs, volume, time and quality)
• Conduct due diligence (formally or informally) of suitable vendors before onboarding 
• Communicate sourcing expectations and establish terms of engagement
• Negotiate mutually beneficial vendor contracts 
• Establish a transparent chain of command and communications to avoid misunderstanding
• Centralise vendor performance monitoring 
• Monitor performance diligently and continuously
• Establish and follow a clearly defined exit strategy to delist nonperforming vendors

Vendor management tools

The suitability of vendor management tools and applications varies with business size. So, an application used by a multinational company may not be suitable for a startup or MSMEs. 

A few of the top vendor management software applications are: 

• SAP Fieldglass - a cloud-based VM system for procuring services and managing an external workforce 
• Airbase - a complete procure-to-pay VM application 
• Clear Vendor Management System - Full-scale cloud-based VM application
• Gatekeeper - simplified VM system for contract management 
• Procurify - a complete procure management system 
• Cobblestone - a VM software application for large-scale operations 

Conclusion

Clear Finance Cloud is a centralised platform for managing vendor compliance, tax filings, and invoice accuracy. We enable invoice accuracy and ensure vendor and tax compliance through our supply chain suite by initiating tax automation directly from the general ledger.

Clear Finance Cloud for Supply Chain will help you: 

• Reduce vendor onboarding time by up to 75% with 100% vendor compliance assurance.
• Experience up to 2.5x faster invoice processing with 100% accuracy for e-invoices and > 90% accuracy for other invoices.
• Achieve 2-5x higher annualised returns with reduced DPO through optimised cash flow and early payment programs.
• 100% on-time payments and zero late payment penalties especially for MSME payments.
• Get government infrastructure connectors (Clear is one of the only 4 IRPs in India) to ensure automatic compliance checks, keeping you up-to-date with the latest regulations.